Monday, May 12, 2014

Can we identify the characteristics of national ideologies that promote economic freedom?

I have had to revise my views about the characteristics of national ideologies
that promote economic freedom after undertaking some research using World
Values Surveys (WVS). I used data from surveys conducted around 2000 and during
the first decade of this Century.

The set of questions I thought would be most relevant relate
to such things as attitudes to competition, potential for hard work to lead to
success, wealth accumulation, income inequality, government ownership and
increased government responsibility. So, I spent a few hours standardizing data
in order to average it and derive an index of economic policy attitudes.

The next set of questions that I thought would be relevant
relate to confidence in major companies and confidence in organisations that
tend to interfere with markets (the government, political parties, parliament
and civil service). I thought that economic freedom was more likely to increase
in countries where there was greater confidence in big business than in
government agencies.

Another question that I thought might be relevant asks
people to choose from four options what they consider to be the most important
aim for the country over the next ten years.
The options are: a high level of economic growth; strong defence forces;
people have more say about how things are done; and trying to make our cities
and countryside more beautiful. I thought that people who favoured a high level
of economic growth might possibly tend to favour increased economic freedom. I
wasn’t over-confident about that, however, because people who claim to be in
favour of high economic growth often seem to me to be inclined to espouse
hair-brained ideas for government interventions to advance that objective.

Finally, I thought a question relating to opinion about
scientific advances might be relevant. I wasn’t sure whether people who are
confident about scientific advances might be more prone to think rationally
about economic policy, or whether they might be prone to scientism and have an
irrational attachment to government planning. Anyhow, I also included a
variable based on the percentage in each country who think that scientific advances
are likely to help mankind.

The regression model sought to explain change in economic
freedom over the period 2001 to 2011 in terms of initial economic freedom, as
well as the four variables discussed above. My rationale for including the
initial level of economic freedom is that the higher the initial level of
economic freedom, the more favourable ideology must be in order to produce a
further increase in economic freedom. The estimated coefficient on that
variable was negative, as expected.

However, to my surprise, the estimated coefficients on the
economic policy and confidence in business variables had the ‘wrong’ sign and
were not significantly different from zero. Leaving those variables out of the
analysis made very little difference to the estimated coefficients on other
variables. Regression estimates for the revised model are as follows:

Intercept 1.250 (0.734)

Economic Freedom 2001 0.740 (0.081)

Economic growth priority 1.058 (0.377)

Science helps 0.449 (0.373)

Adj. R2 0.60

Changes in economic freedom predicted by the model are
compared with actual changes in economic freedom in Chart 1.

The outliers in the chart are of some interest because they
show the importance of factors other than the prevailing growth ideology of the
population – an obvious factor is political leadership – in causing changes in
economic freedom. The results support the view that the anti-economic freedom policies
followed in Venezuela and Argentina, for example, do not have much support from
the populations of those countries.

The results of the regression analysis suggest that a country
like the US or Australia with a relatively high level of economic freedom (i.e.
a rating of about 8) would need to have prevailing
attitudes toward economic growth that are around average (relative to the
countries included in the analysis) in order to avoid a decline in economic
freedom. That may actually be less likely to happen than you might think
because people in countries like the US and Australia tend to give lower
priority to economic growth than do people in countries with lower average
income levels. I will discuss the implications in my next post.

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